Workers excavate and prepare the site for the Lumen, a 34-story apartment tower, at the eastern edge of downtown Cleveland's theater district on Monday. The building and a 530-space parking garage are scheduled to open in mid-2020.
(Michelle Jarboe/The Plain Dealer)

The port's board voted Thursday to issue the bonds, which will replace existing real estate debt and generate new cash for development. The port will be a middle man in the transaction, bearing no risk and collecting an estimated $170,000 fee.

Roughly a third of the money - close to $30 million - will refinance debt tied to Playhouse Square's other real estate and at least partially repay a loan on the Idea Center building on Euclid Avenue.

The remaining funds will flow to the Lumen, a $135 million residential high-rise that Playhouse Square and its development manager, Hines, started building in early April. The 319-unit tower and 530-space parking garage, at Euclid and East 17th Street, are scheduled to open in mid-2020.

An evening view shows the Lumen apartment building's lobby and the illuminated garage, dressed up for a Broadway show in the district.SCB

Issuing tax-exempt bonds - something only a governmental agency like the port can do - will result in interest-rate savings for Playhouse Square, said Ryan Sommers, a financial consultant on the project.

Though the Lumen was the impetus for the deal, the bond transaction draws on the strength of Playhouse Square's entire balance sheet, including its theaters, office buildings, and other properties.

The combination refinancing-new financing will allow the nonprofit to lock in a low, fixed interest rate; free up more cash for the apartment project by accessing untapped equity in Playhouse Square's other buildings; and enable the foundation to take on a much smaller construction loan - $65 million, to be split among four banks - than a private developer would need.

"Banks have indicated they want to limit their exposure to downtown apartment projects," Sommers, managing director of financial services at Project Management Consultants in Cleveland, wrote in an email. "The Lumen project is conservatively underwritten from the banks' standpoint, with over $75 million of combined equity and public sources. A traditional, for-profit developer would not typically undertake a project with that level of equity required."

Playhouse Square has committed nearly $17 million in equity to the project, along with a $5 million reserve, according to a document distributed at the port board's meeting. The nonprofit is drawing on a large gift from the Richard J. Fasenmyer Foundation that was earmarked for the residential building and garage.

None of the money is coming from the nonprofit's fundraising for its ongoing $100 million capital campaign, which is focused on theater restoration, maintenance, programming, education and district beautification.

Art Falco, Playhouse Square's chief executive officer, said that revenues from the apartment building and garage should more than cover the debt payments. Though the bond issue will be tied to the entire operation, he doesn't expect to tap income from the nonprofit's other buildings or theater operations to repay bondholders.

"This project will be self-supporting," Falco said.

A rendering shows the facade of the apartment tower from the northeast.SCB

Two years before opening, without any advertising, Playhouse Square already has a list of 90 people who have expressed interest in living at the Lumen, said Patty Gaul, the nonprofit's general counsel and chief financial officer.

She told members of the port's board that Playhouse Square's financial projections place apartment rents at $2.35 per square foot. That's about $3,500 a month for a 1,500-square-foot apartment - though downtown rents could be higher by 2020.

The Lumen will house a mix of one-, two- and three-bedroom units. The garage will include a rooftop amenity deck for tenants and street-level commercial space on Euclid. Gaul said Playhouse Square is hoping to land resident-centric retail, such as a dog-grooming business or bicycle maintenance and repair shop.

Based on conversations with ratings agency Standard & Poor's, Playhouse Square expects to receive its first credit rating as soon as next week. Executives anticipate a rating of BB+, just a notch below investment grade.

Without the added risk of the tower, Playhouse Square's first-ever residential project, the foundation's rating would have been slightly higher, Falco said. He expects that rating to rise over time, as the apartments lease up and Playhouse Square refinances its construction debt.

The bonds are likely to be issued in late May. Playhouse Square hopes to close on the rest of its financing in June. The project includes a $1 million state grant and qualifies for residential property-tax abatement, which the city of Cleveland offers for housing projects that meet certain green-construction standards.

Cleveland City Council is considering legislation for tax-increment financing, which would allocate a portion of new property taxes generated by the project to paying off debt. That arrangement would not cut into money earmarked for the Cleveland schools. Another piece of legislation proffers a $1 million, partially forgivable loan for the project.

Playhouse Square also has talked to Cuyahoga County about financial assistance, though there's nothing formal on the table.